Leasing Update: New Regulations Place Onus on Tenants
All you need to know if you are a party to a Commercial Lease during Covid-19
As anticipated in our earlier article, the Victorian Government passed regulations on 1 May 2020 for the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 (the Regulations). The Regulations provide guidance to small-to-medium enterprises to negotiate rent relief in Victoria in the spirit of the National Cabinet Mandatory Code of Conduct (the Code) however, surprisingly, they do not strictly mimic the Code and have thus created some further uncertainty around landlord and tenants’ rights.
The Regulations departures from the Code have resulted in small wins for both landlords and tenants as summarised below. As expected, they will operate retrospectively from 29 March 2020 through to 29 September 2020 (known as the ‘Relevant Period’) and cannot be contracted out of by the parties meaning they are mandatory unless the parties agree otherwise. While they do not strictly-speaking replace the Code, they are now the only legislated reference point of law for certain eligible lease disputes as the Code remains ‘mandatory’ in title only and ‘advisory’ for all other leases. Interestingly, the Regulations do not require the amount of rent relief to be directly proportionate to the reduction in the tenants’ turnover.
Which are “Eligible Leases”?
The Regulations apply only to “eligible leases” which by definition must meet all four criteria:
- the lease must be a retail lease (under the Retail Leases Act 2003) or a commercial lease or licence for the sole or predominant purpose of carrying on a business at the premises;
- the lease must have been ‘in effect’ on 29 March 2020;
- the tenant must be an ‘Small to Medium Enterprise entity’ (see further below); and
- the tenant must be an employer who qualifies under and participates in the JobKeeper scheme.
What is a “Small to Medium Enterprise” (SME)?
To determine whether a tenant is an SME its turnover must be examined (and thus disclosed) and must be under $50million. Annual turnover can include various types of income from sales of goods, services, commissions, rental, subsidies, interest and other operating income.
The Regulations have, as anticipated, better defined the eligibility of franchises and corporate groups however it requires an analysis of the Income Tax Assessment Act (ITAA). If this eligibility is in dispute we would suspect that a forensic analysis may be required to prove whether the tenants turnover is to be assessed individually or as a “prescribed group” being a tenant that is connected with other entities (within the meaning of s328-125 or 328-130 of the ITAA) with another entity or other entities.
What Must a Tenant do to Obtain Rent Relief?
The Regulations place the onus on the tenant to begin the process for rent relief if they want to obtain protection by the Regulations; a tenant MUST:
- meet the eligibility criteria mentioned above; and
- make a written request to its landlord for rent relief which includes:
- a statement that the tenants lease is an eligible lease; and
- evidences that the tenant is an SME; and
- evidences that the tenant qualifies for and participates in the Jobkeeper Scheme.
It follows therefore that until a tenant has requested such relief and proven their eligibility they are not strictly protected and a landlord may potentially issue a notice for a breach of lease (though this is not encouraged, it may be required if a tenant is completely unresponsive).
The Regulations do not specify what financial information is required to be provided to the Landlord though The Small Business Commission is expected to provide guidelines soon. We would expect as a minimum, trading figures along with comparatives from pre-covid periods would be necessary and that these would need to be provided either directly from accounting software or verified by a bookkeeper/accountant.
If the tenant’s financial circumstances change during the Relevant Period of the Regulations, the tenant can make a further request for rent relief following the same procedures.
What must a Landlord do if a Tenant Requests Relief?
Once a landlord receives a request from a tenant in line with the Regulations, the landlord must respond with an offer of rent relief within 14 days (unless otherwise agreed).
There is a freeze on rent increases, no fees interest or charges can be levied on deferred rent and any outgoings refunds obtained must be passed on to tenants. Unlike the Code however, which specified a directly proportionate reduction, a landlord’s offer of relief can now be ‘based on all the circumstances of the eligible lease’ which will allow significant flexibility to the offer made by the landlord. Such offer MUST:
- relate to up to 100% of the rent payable under the lease;
- provide that no less than 50% of the rent relief package offered must be in the form of a waiver (see below)
- apply to the 6 months of the Relevant Period; and
- ‘take into account’ the following:
- the reduction in a tenants turnover associated with the (specific) premises during the relevant period;
- whether a failure to offer rent relief would compromise a tenants ability to fulfil the lease obligations (ie. the tenants current and future solvency);
- the landlords’ financial ability to offer rent relief (including any relief provided by lenders);
- and any reduction to any outgoings offered or any waiver of outgoings that a landlord may decide to give (if a business entirely shuts down);
Importantly, the landlords’ financial ability to offer relief is included as this was not part of the Code in detail. Consequently, a rent relief offer from a landlord who is a retiree with no income other than the particular leases rental may look very different to what would be expected of a corporate landlord.
At least 50% of the rent relief must be in the form of a waiver (unless otherwise agreed between the parties in writing). It follows therefore that the balance must be provided by way of a rent deferral, Regulation 16 provides that:
- a landlord must not request payment of any part of the deferred rent until the earlier of:
- the expiry of the Relevant Period (29 September 2020); and
- expiry of the term of the eligible lease.
- the lease must be varied to pay the deferred rent amortised over the greater of:
- balance of the term (including any extension of the term); and
- a period of no less than 24 months.
What then if the Parties Cannot Reach Agreement?
Once an eligible tenant has received the landlord’s offer, the parties must negotiate in good faith to agree on the rental relief to apply during the Relevant Period. Given all circumstances of the tenant and landlords financial situation are relevant it will require the parties to provide accurate and honest representations to one another and all such information must remain confidential.
If a dispute exists, either a landlord or tenant may refer a dispute about the terms of the lease under the Regulations to the Small Business Commission via an online application form for a free mediation.
Despite the outcome of the tenant’s request for rent relief, provided the tenant has complied with the provisions of Regulation 10 summarised above, the tenant will not be in breach of that lease if they fail to pay rent required under that lease. We suspect that landlords will be more likely to request the mediation therefore (if a tenant proves eligibility but doesn’t agree to the landlords offer). Civil penalties of up to approximately $3600 can be imposed on landlords for terminating a lease, taking possession or claiming against securities based on the non-payment of rent or reduction in trading hours during the period of the regulations.
Parties to a mediation may choose to have legal representation and our firm can certainly assist in this process. A lease dispute may only be the subject of VCAT or court proceedings (other than the Supreme Court) if the Small Business Commission has certified in writing that the mediation has failed or is unlikely to resolve the dispute.
What to do once an Agreement is Reached?
Once agreed, rent relief under the Regulations can be given effect by a variation to the lease or a separate side agreement. However, as is always the case when dealing with land, it is important to record the agreement and have it signed by both parties. If an agreement has already been reached between the parties it is unclear how the regulations will apply however given a tenant has a right to reapply during the Relevant Period we suspect that any prior agreements may be voidable if there is a change in circumstances. Our Property Team are currently assisting many tenants and landlords through these times and are readily available to assist in advices, negotiations, mediations and documenting agreed variations to your lease.
About Best Hooper – Victoria’s Property, Planning and Land Development Advisory Law Firm
Best Hooper are the oldest and most prominent developer focused law firm in Victoria who have served our community since 1886; through wars, recessions, depressions and pandemics. We are actively advising clients in relation to the COVID-19 outbreak on all property related matters including leasing, disputes, property transactions and planning advices and applications. We are continuously recognised as industry leaders in a variety of publications, including Doyles Guide and Best Lawyers.
If you require more information, please contact Giancarlo Romano, (03) 9691 0220 or firstname.lastname@example.org.
Giancarlo Romano is a Senior Associate in the Best Hooper Property Team who represents private and corporate landlords and tenants across commercial, retail and residential leasing and all facets of property transactions.
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